A few days ago, at its Monetary Policy meeting, the Central Bank lowered the Monetary Policy Rate by 50 basis points to 6%. Is it feasible that the Central Bank will begin to graduate its next reductions even further? In what magnitudes will they be?

In my view, the market expects the magnitudes, as well as the pace, to be even more gradual, the market expects the magnitudes, as well as the pace, to be even more gradual, where the TPM will continue to be reduced, taking into account the evolution of the macroeconomic market, giving rise to another question: Why not a pause in the meetings remaining to December? This, given that inflation is slowing towards the 3% target over a 2-year horizon.

What do further reductions mean for DAPs? 

In practice, this means that the term deposit will become less attractive as further cuts occur, leaving behind the boom of previous years in search of high yields, tipping the balance towards other instruments. This is where we have seen a migration to other assets, mainly Money Market. These instruments would give a more attractive return, considering that the Funds are in a range of 0.50-0.60% monthly and a 12-month term deposit yields around 0.49-0.50%.

That is, in the Funds the duration is shorter. With an average portfolio 90-120d against a 360d deposit with a falling MPR, the Fund becomes more attractive.

Similarly, the latest 50 bp rate cut has attracted the attention of the market for deposits for deposits, giving it a little more air, with a demand in durations over 1y in search of a re-engagement, waiting for needs and shortfalls that grant premium in the IRR mainly, rather than good quality issuers (Fly to Quality).

Simply put, the market is looking to SELL areas under the year y BUY longlooking for better rates on issuers that offer a higher premium (Premium vs. Market Price). The sense of needs is not entirely clear, the market is liquid, evidencing an enduring primary market with excesses looking for maturities of (FCIC). 2nd Rating (AA) issuers in search of hedges sound attractive to invest in longer maturities, where the required premium (+60; +70 bp) is appreciated while waiting for the next rate decision. (Rolling Short).

Victor Valenzuela
Fixed Income Trader / Domestic Financial Intermediation Instruments